TOKYO, Jan 21 (Reuters) - The yen plunged into a fresh 2-1/2year low against the dollar before quickly bouncing back onMonday as traders nervously braced for a Bank of Japan meetingthat could see the central bank commit to an aggressivereflationary policy.

Facing relentless political pressure to pull the country outof deflation, the BOJ is expected to unveil a raft of policysteps including a 2 percent inflation target at its two-daymeeting that ends on Tuesday.

The dollar rose to as high as 90.25 yen in earlytrade, edging past the previous high around 90.21 set Friday.But as traders rushed to lock in gains on caution ahead of theBOJ's policy meeting, it slipped to 89.70, 0.5 percent below itslate U.S. levels last week.

Since mid-November, the dollar has risen about 13 percent onthe yen.

"From here we will probably see rallies sold into ineuro/yen, Aussie/yen etc as the street reduces short yenpositions into the BOJ meeting tomorrow," said Jeffrey Halley,FX trader for Saxo Capital Markets in Singapore.

The euro bought 119.50 yen, off a 20-month peakof 120.73 last week while the Australian dollar shed 0.3 percentto 94.40 yen, slipping from a four-year high of 95.02set Friday.

"We think the whole hope on the BOJ's policy will be peakingout soon barring any surprises tomorrow," said Minori Uchida,chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

"The dollar could rise to as high as 91 yen but it willeventually return to 80-85 yen," he added.

Market expectations on the BOJ meeting are unusually high. Traders say financial markets are expecting a joint statementwith the government to target two percent inflation, an increasein asset purchases with an open-end commitment, and possiblyother measures such as cutting interest rates on excessreserves.

Data last Friday showed currency speculators slightlytrimmed their bets against the yen in the week to Jan. 15,although they remained overwhelmingly negative on the currency.

Many market players remain pessimistic on the yen.

"We expect the door for further easing will likely be leftopen irrespective of the outcome of BOJ policy meeting, eitherexplicitly by the BOJ or implicitly through government's plan tonominate doves to replace the governor and deputy governors,"analysts at Barclays Capital wrote in a client note dated Jan.20.

"Expectations of an aggressive monetary policy stance undernew BOJ leadership are likely to provide support for USD/JPY incoming weeks. A post-announcement dip, if any, would providebetter a entry level to go long USD/JPY."

Traders said there has been strong demand for optionsbetting on further yen weakness, with one-month dollar/yenimplied volatility - a measure of expected pricemovement - rising to its highest since August 2011 on Friday.

With all eyes on the BOJ, other currencies took somewhat of abackseat.

The euro stood flat at $1.3323, having been capped bythe $1.3400 level in the past week and facing strong resistancejust under $1.3500.

The single currency showed muted response to a victory ofGermany's centre-left opposition in a regional vote in LowerSaxony on Sunday. The euro crisis did not play much of a role inthe vote.

Sterling slipped to a two-month low of $1.5838,remaining under pressure after an unexpected fall in retailsales last month raised the likelihood that Britain was slippinginto its third recession in four years.

The Australian dollar, which came under a bit of profittaking late last week, continued to see good support under$1.0500. It was last at $1.0507, having bounced off a1-1/2 week low of $1.0485 Friday.